Business Forecasting: Anjana Vivek
This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA
Overview
Download & View Business Forecasting: Anjana Vivek as PDF for free.
More details
- Words: 1,397
- Pages: 35
Business Forecasting Anjana Vivek [email protected] www.bizkul.com
1
Future analysis
Forecasting summarises future expectations of: Business strategy Accounting Financial analysis Projects future expected scenario, keeping past in view www.bizkul.com
2
Financial Statements Forecast should consist of the following statements:
Balance sheet Profit and loss account Cash flow
www.bizkul.com
3
Future prediction There should be a believable story about the future performance of the company. For eg.
“Sales is expected to grow at more than average industry expected rate of growth in this BPO company. This is because of the quality of the management team, the investors and the past track record of the company in getting and retaining customers.” www.bizkul.com
4
Strategic perspective
The strategic rationale should be based on careful understanding of the company industry and general economic scenario
www.bizkul.com
5
Strategic perspective
Value is driven by the excess of return over cost of capital over a long period of time. This comes out of competitive advantage, which could be due to: Superior product, service Lower costs Better utilisation of assets and capital www.bizkul.com
6
Strategic perspective
Porter model Customer segmentation Competitive business systems SWOT analysis
Source: Valuation : Tom Copeland, Tim Koller, Jack Murrin www.bizkul.com
7
Porter model
Substitute products / services Supplier bargaining power Customer bargaining power Entry/exit barrier
www.bizkul.com
8
Substitute products
Porter model
Speed post and courier service competing in the service industry Replacement of glass containers by metal cans
www.bizkul.com
9
Supplier bargaining power Porter model
Shortage of technology experts commanding premium for services rendered Unique products or products with a difference commanding better price due to requirement of buyer
www.bizkul.com
10
Customer bargaining power Porter model
Driving down of prices by customers of software services companies Customers moving from wholesale stores to retailers as retail stores are driven to pass on some of their margins to their customers www.bizkul.com
11
Entry / exit barriers
Porter model
Limited availability of persons with skill sets Minimum capital requirement for setting up of BPO in a specific area Cost of exit, closure and retrenchment may be prohibitive due to statutes www.bizkul.com 12
Customer Segmentation
Explicit identification of reason of selection of one company’s product over another Analyses the level of difficulty in differentiation by competitors Looks at profitability of customers, based on their need and cost of servicing them www.bizkul.com
13
Customer Segmentation
Customer perspective – Product attributes have different impact on different kinds of customers (small manufacturers may need after sales service unlike bigger industries) – Variation in product offerings may impact sales as some customers may prefer some bundled product offerings as compared to others which are stand alone www.bizkul.com
14
Customer Segmentation
Customer perspective – Segmentation of groups of customers force analysts to understand why customers prefer one product over other (eg. in courier service some customers want detailed tracking of parcel, others do not)
www.bizkul.com
15
Customer Segmentation
Producers perspective – Different customers have different costs of servicing
Advantage of segmentation is that this helps identify existing and potential competitive advantages
www.bizkul.com
16
Competitive Business System
Analysis from product design to after sales service – Product design, development, procurement, manufacturing, marketing, sales & distribution Attempt to understand competitive advantage, whether through lower costs, better capital use or superior customer value – (eg. A company may have advantage of greater labour productivity, which needs to be addressed by some alternate cost saving or variation in product offering etc) www.bizkul.com
17
Competitive Business System
Product design, development
(product
attributes, quality, time to market, IP)
Procurement
(Access to sources, costs,
outsourcing)
Manufacturing (Costs, cycle time, quality) Marketing (Pricing, advertisement, packaging)
Sales and distribution
(Sales effectiveness, costs, channels, transportation) www.bizkul.com
18
SWOT analysis
Strengths Weaknesses Opportunities Threats
Check for links and patterns in these heads www.bizkul.com
19
Capture strategy into financial forecasts
Initially start with profit and loss accounts and balance sheet Cash flow can be next derived from these Prepare by keeping key ratios and assumptions in mind
www.bizkul.com
20
Forecasting methodology
Understand business strategy Develop a complete picture Develop a complete financial forecast of the BS, P&L and CF statements In short term calculate detailed numbers, in long term summarise trends expected www.bizkul.com
21
Forecasting methodology
Compute sensitivity analysis, for key drivers Compute probability scenarios, in the minimum, compute the following scenarios: – Normal – Optimistic – Pessimistic www.bizkul.com
22
Forecasting methodology
Consistency checks – key ratios and internal consistency – industry parameters
Cash flow and liquidity – How will company raise funds – How will funds be utilised
Verify that the final numbers reflect the overall strategy of business www.bizkul.com
23
Starting point
Make a start What are the key drivers of the business – now and in the future? What do you think are possible starting points? Translate your business story in words into financial numbers www.bizkul.com
24
Financial forecasts
The general approach is to start with demand, based on which profit and loss statement is drawn up Demand translates into sales
Revenue numbers are sensitive to volumes and prices They also depend on product mix www.bizkul.com
25
Starting point for startups
In the case of early stage companies which have not yet turned profitable the following are the key drivers of the business forecast for valuation purposes Cash burn Stake that the promoters are willing to offer to the private equity investor/venture capitalist www.bizkul.com
26
Financial forecasts
Expenses are based on sales Capex depends on capacity required to generate revenues projected as well as utilisation of capacity Revenue expenses are calculated based on trends and requirements One cannot just run an analysis One has to understand trends And then - Plan for the future www.bizkul.com
27
Revenues forecast
Dependent on industry and business
– Eg. retail industry, based on number of stores – ITES based on number of seats – Manufacturing dependent on product mix Understanding Starting point normal industry – Demand and supply behavior is – Market size and market share Necessary but not – Break even point sufficient – Growth trends www.bizkul.com 28
Earnings trends
Generally observe 3 to 5 years Check economic cycles – ie seasonal/cyclic industries etc Check and remove unusual items Understand relevance of items to normal earnings
www.bizkul.com
29
Adjustments/changes to earnings
Remove one time items Remove abnormal/super earnings which may not be sustainable Remove items not at market value or not at arms length Account for changes in accounting policy (gross vs. net income etc.) Consider if future business can be based on past earnings and www.bizkul.com 30 strategy
Forecasting earnings
Past trends Average of past few years Industry trends Market share Forecast based on expected strategy
www.bizkul.com
31
Some difficulties faced
Incorrect adjustments Adjustments only partially done, ie in asset & not in impact of asset on earnings/expenses (eg. land & rent on land) Error in calculation of growth Error in base calculation of earnings www.bizkul.com
32
Expenses forecast
Expenses to be listed, item by item – Key drivers to be identified (eg salary – driven by no. of people as well as expected salary costs) – Industry benchmarks may be used for cross referencing (variations/deviations are to be justified)
Capex – Based on requirement to reach target revenues – Also impacts depreciation & cash flow www.bizkul.com
33
Balance sheet and Cash flow forecast
Balance sheet accounts to be individually forecast – Based on expected sales and utilisation of assets, company policies (debtors collection period etc)
Cash flow – Based on forecast of balance sheet and profit and loss account – Consistency check is important after getting the first set of numbers www.bizkul.com
34
In Summary
Forecasting is the first step of prospective analysis It is the start for any valuation process The best way to forecast is to do it comprehensively and in detail including all key financial statements The forecast must stand up to scrutiny; must be internally consistent www.bizkul.com
35
1
Future analysis
Forecasting summarises future expectations of: Business strategy Accounting Financial analysis Projects future expected scenario, keeping past in view www.bizkul.com
2
Financial Statements Forecast should consist of the following statements:
Balance sheet Profit and loss account Cash flow
www.bizkul.com
3
Future prediction There should be a believable story about the future performance of the company. For eg.
“Sales is expected to grow at more than average industry expected rate of growth in this BPO company. This is because of the quality of the management team, the investors and the past track record of the company in getting and retaining customers.” www.bizkul.com
4
Strategic perspective
The strategic rationale should be based on careful understanding of the company industry and general economic scenario
www.bizkul.com
5
Strategic perspective
Value is driven by the excess of return over cost of capital over a long period of time. This comes out of competitive advantage, which could be due to: Superior product, service Lower costs Better utilisation of assets and capital www.bizkul.com
6
Strategic perspective
Porter model Customer segmentation Competitive business systems SWOT analysis
Source: Valuation : Tom Copeland, Tim Koller, Jack Murrin www.bizkul.com
7
Porter model
Substitute products / services Supplier bargaining power Customer bargaining power Entry/exit barrier
www.bizkul.com
8
Substitute products
Porter model
Speed post and courier service competing in the service industry Replacement of glass containers by metal cans
www.bizkul.com
9
Supplier bargaining power Porter model
Shortage of technology experts commanding premium for services rendered Unique products or products with a difference commanding better price due to requirement of buyer
www.bizkul.com
10
Customer bargaining power Porter model
Driving down of prices by customers of software services companies Customers moving from wholesale stores to retailers as retail stores are driven to pass on some of their margins to their customers www.bizkul.com
11
Entry / exit barriers
Porter model
Limited availability of persons with skill sets Minimum capital requirement for setting up of BPO in a specific area Cost of exit, closure and retrenchment may be prohibitive due to statutes www.bizkul.com 12
Customer Segmentation
Explicit identification of reason of selection of one company’s product over another Analyses the level of difficulty in differentiation by competitors Looks at profitability of customers, based on their need and cost of servicing them www.bizkul.com
13
Customer Segmentation
Customer perspective – Product attributes have different impact on different kinds of customers (small manufacturers may need after sales service unlike bigger industries) – Variation in product offerings may impact sales as some customers may prefer some bundled product offerings as compared to others which are stand alone www.bizkul.com
14
Customer Segmentation
Customer perspective – Segmentation of groups of customers force analysts to understand why customers prefer one product over other (eg. in courier service some customers want detailed tracking of parcel, others do not)
www.bizkul.com
15
Customer Segmentation
Producers perspective – Different customers have different costs of servicing
Advantage of segmentation is that this helps identify existing and potential competitive advantages
www.bizkul.com
16
Competitive Business System
Analysis from product design to after sales service – Product design, development, procurement, manufacturing, marketing, sales & distribution Attempt to understand competitive advantage, whether through lower costs, better capital use or superior customer value – (eg. A company may have advantage of greater labour productivity, which needs to be addressed by some alternate cost saving or variation in product offering etc) www.bizkul.com
17
Competitive Business System
Product design, development
(product
attributes, quality, time to market, IP)
Procurement
(Access to sources, costs,
outsourcing)
Manufacturing (Costs, cycle time, quality) Marketing (Pricing, advertisement, packaging)
Sales and distribution
(Sales effectiveness, costs, channels, transportation) www.bizkul.com
18
SWOT analysis
Strengths Weaknesses Opportunities Threats
Check for links and patterns in these heads www.bizkul.com
19
Capture strategy into financial forecasts
Initially start with profit and loss accounts and balance sheet Cash flow can be next derived from these Prepare by keeping key ratios and assumptions in mind
www.bizkul.com
20
Forecasting methodology
Understand business strategy Develop a complete picture Develop a complete financial forecast of the BS, P&L and CF statements In short term calculate detailed numbers, in long term summarise trends expected www.bizkul.com
21
Forecasting methodology
Compute sensitivity analysis, for key drivers Compute probability scenarios, in the minimum, compute the following scenarios: – Normal – Optimistic – Pessimistic www.bizkul.com
22
Forecasting methodology
Consistency checks – key ratios and internal consistency – industry parameters
Cash flow and liquidity – How will company raise funds – How will funds be utilised
Verify that the final numbers reflect the overall strategy of business www.bizkul.com
23
Starting point
Make a start What are the key drivers of the business – now and in the future? What do you think are possible starting points? Translate your business story in words into financial numbers www.bizkul.com
24
Financial forecasts
The general approach is to start with demand, based on which profit and loss statement is drawn up Demand translates into sales
Revenue numbers are sensitive to volumes and prices They also depend on product mix www.bizkul.com
25
Starting point for startups
In the case of early stage companies which have not yet turned profitable the following are the key drivers of the business forecast for valuation purposes Cash burn Stake that the promoters are willing to offer to the private equity investor/venture capitalist www.bizkul.com
26
Financial forecasts
Expenses are based on sales Capex depends on capacity required to generate revenues projected as well as utilisation of capacity Revenue expenses are calculated based on trends and requirements One cannot just run an analysis One has to understand trends And then - Plan for the future www.bizkul.com
27
Revenues forecast
Dependent on industry and business
– Eg. retail industry, based on number of stores – ITES based on number of seats – Manufacturing dependent on product mix Understanding Starting point normal industry – Demand and supply behavior is – Market size and market share Necessary but not – Break even point sufficient – Growth trends www.bizkul.com 28
Earnings trends
Generally observe 3 to 5 years Check economic cycles – ie seasonal/cyclic industries etc Check and remove unusual items Understand relevance of items to normal earnings
www.bizkul.com
29
Adjustments/changes to earnings
Remove one time items Remove abnormal/super earnings which may not be sustainable Remove items not at market value or not at arms length Account for changes in accounting policy (gross vs. net income etc.) Consider if future business can be based on past earnings and www.bizkul.com 30 strategy
Forecasting earnings
Past trends Average of past few years Industry trends Market share Forecast based on expected strategy
www.bizkul.com
31
Some difficulties faced
Incorrect adjustments Adjustments only partially done, ie in asset & not in impact of asset on earnings/expenses (eg. land & rent on land) Error in calculation of growth Error in base calculation of earnings www.bizkul.com
32
Expenses forecast
Expenses to be listed, item by item – Key drivers to be identified (eg salary – driven by no. of people as well as expected salary costs) – Industry benchmarks may be used for cross referencing (variations/deviations are to be justified)
Capex – Based on requirement to reach target revenues – Also impacts depreciation & cash flow www.bizkul.com
33
Balance sheet and Cash flow forecast
Balance sheet accounts to be individually forecast – Based on expected sales and utilisation of assets, company policies (debtors collection period etc)
Cash flow – Based on forecast of balance sheet and profit and loss account – Consistency check is important after getting the first set of numbers www.bizkul.com
34
In Summary
Forecasting is the first step of prospective analysis It is the start for any valuation process The best way to forecast is to do it comprehensively and in detail including all key financial statements The forecast must stand up to scrutiny; must be internally consistent www.bizkul.com
35
Related Documents
Business Forecasting: Anjana Vivek
May 2020 7
Anjana Vivek [email protected]
May 2020 4
Venture Capital: Anjana Vivek
May 2020 4
Vivek
May 2020 5
Vivek
October 2019 15